European Central Bank Decides to Pause Interest Rate Cuts Due to Continued High Inflation Pressures

July 18, 2024 TruthUSA

According to recent data, Eurozone inflation dropped from a peak of 11.6 percent in October 2022 to 2.5 percent in June, still below the target of 2 percent.

The central bank governing the 20 European Union countries that utilize the euro as their currency has chosen to maintain its benchmark interest rate at its current level. This decision was made due to high price pressures, particularly in services, which are expected to lead to inflation above the target through 2025 according to policymakers.

The European Central Bank (ECB) governing council voted on July 18 to keep the key rate at 3.75 percent, following a slight cut previously in June.

The council’s reasoning for halting rate cuts was based on economic indicators suggesting that achieving the 2 percent inflation target would require more time than anticipated.

In June, Eurozone inflation stood at 2.5 percent, down from the peak of 11.6 percent in October 2022 signaling slower progress towards the desired target.

The ECB’s current monetary policy remains stringent, maintaining high borrowing costs which may limit demand. Despite these measures, the council stated that domestic inflation pressures persist, service sector inflation remains high, and overall inflation is expected to stay above the target well into the following year.

The International Monetary Fund (IMF) recently highlighted the issue of elevated service-sector inflation, forecasting a slower decline in global inflation, including in the U.S., in the latter part of the year.

Raising interest rates can lead to increased costs in borrowing, spending, and investment, which can help reduce demand and ease inflationary pressures. The delay in rate cuts from the ECB and the U.S. Federal Reserve could be a result of the prolonged high inflation.

It remains uncertain if the European central bank will lower rates at its upcoming September meeting, as policymakers have emphasized they are not committed to a specific course of action and will rely on future economic and financial data to make their decision.

“Our goal is to bring inflation back to our target of two percent in a timely manner,” stated Christine Lagarde, President of the ECB, following the interest rate announcement on July 18. “We will maintain policy rates at restrictive levels as needed to achieve this objective.”

The decision means that individuals and businesses in Europe hoping for lower interest rates will need to wait longer before benefiting from reduced borrowing costs.

The standing of the ECB is akin to that of the Fed, with expectations that the benchmark interest rate will remain unchanged at 5.25–5.5 percent at the July policy meeting, although there is a high likelihood of a rate cut in September, according to market indicators.

Regarding economic activity in the euro area, Lagarde noted a slowdown in growth during the second quarter, with services leading the expansion while industrial production and goods exports remained subdued.

The ECB anticipates inflation in the euro area to hover around current levels for the remainder of the year, with next year’s projections influenced by tight monetary policy and weaker growth in labor costs.

“Domestic inflation persists, wage growth remains high, compensating for prior inflationary periods,” Lagarde remarked.

Profits of businesses declined in the first quarter and are expected to remain suppressed in the short term, counteracting the inflationary impact of rising wages, added Lagarde.

In the U.S., Federal Reserve Chair Jerome Powell expressed confidence in inflation reverting to the 2 percent target, with June’s annual inflation rate at 3 percent, down from 3.3 percent in May.

In a statement supporting expectations for an impending rate cut, Powell noted that the Fed would not wait for inflation to reach 2 percent before taking action.

The current benchmark interest rate set by the Fed stands at 5.25–5.5 percent, the highest level in over two decades.

Source link